Kirk Maldonado

mbozek: I can tell you from personal experience that there are some defunct law firms that had huge losses from that trade or business that passed through to partners, in order of magnitude of hundreds of thousands of a dollars for a single year.

If the loan and other documents don't say who is to pay off the rest of the debt, the safest approach is to hire an independent fiduciary on behalf of the ESOP.

If my memory is right (which is always an iffy proposition), the DOL stated in the preamble to the claims procedure regs that those rules don't apply for purposes of determining the qualified status of a DRO. Whether that statement carries any force is an interesting question. A nonqualified plan is subject to Part 5 of Title I of ERISA, which contains the claims procedure rules. But it is not subject to Part 2 of Title I of ERISA, which contains the QDRO rules. But it is instructive as to what the DOL thinks about whether the claims procedure rules should apply to QDRO determinations.

Lori: Could you explain what a "Georgetown Lobotomy" is? I hope it isn't caused by attending Georgetown University, because it does, then I'm in big trouble since I have a degree from there. That makes me wonder--does the fact that I have to ask what one is, is that conclusive proof that one was performed on me? That would certainly explain a lot of things in my life.

Actually, the IRS has expressly approved them, but the medical expense is limited to the cost in excess of what the improvement raised the value of the property. Thus, if the swimming pool cost $10,000 but only raised the value of the property by $8,000, the medical expense woudl be limited to $2,000. My guess is that there is a discussion of this on Publication 502 ("Medical and Dental Expenses"), which can probably be found on the IRS website.

Mbozek: You asked: My recollection is that there is a discussion of this point in the BNA Tax Management Portfolio on distributions. One reason, which may or may not be listed in the portfolio, is that the person might have some expiring tax losses that could be used to shelter the income relating to the distribution. Interestingly enough, I am working on a coporate transaction right now where both parties are very motivated to get the deal done soon because of some expiring tax losses.

There is at least one PLR and one DOL opinion dealing with this issue, if you care to do some research.

jigpsu100: As a practical matter, it makes no economic sense for the employer to fight the DRO because there is generally no impact on the plan if the amounts are paid to the employee or to the former spouse. Although the DOL got involved in some of the court cases involving tax-qualified retirement plans that lead to the enactment of the QDRO rules as part of the Retirement Equity Act of 1984, my impression is that the DOL has not been involved in any of the recent DRO cases involving plans other than tax-qualified retirement plans. However, I've not researched this issue, so I could be wrong. Also, I doubt that the IRS would want to stir up this hornet's nest, so I can't imagine it trying to impose adverse tax consequences on a welfare plan that complied with a DRO. In summary, I think you solution has little risk of any real downside exposure, so I agree with mbozek's assessment of the situation.

Alf: While I agree that there are some abuses and a lot of close questions on dual-use property, there are some cases where it is justified. Having had severe asthma as a child (I was unable to attend school for three solid months when I was in third grade), I can tell you from personal experience that air conditioning can literally be a life-saver for some asthma sufferers. I would have to sit in front of the air conditioner for extended periods of time because that was the only way that I could breathe without inducing another coughing attack, which could last as long as thirty minutes at a time. Also, for people with severe arthritic problems, a swimming pool can be very beneficial. It would seem that if the person has had to have one or more joints replaced, it would seem to be pretty strong evidence that their arthritis inhibits them from exercising other than in a weightless environment.

JanetM is right that in that this issue can draw you into some pretty ugly situations (no pun intended) where it is very difficult to decide. However, I have seen some people with acne scars so severe that I would have no trouble classifying them as disfiguring. Why don't you ask the participant to get his or her doctor to write something that would support the participant's position? It would seem that you should be pretty safe if you have something in writing from the attending physician. (While you should be protected by the letter, the IRS may still try to tax the participant on the amount of the reimbursement.) Does anybody else have a better idea on how to deal with this?

Ken: Yes, those terms are synonymous. To restate the point that Gburns made in a slightly different manner, a cafeteria plan may offer: 1. health care reimbursement accounts (which could also be called health care flexible spending accounts); 2. dependent care reimbursement accounts (which could also be called dependent care flexible spending accounts); or 3. both of those features. In addition, a cafeteria plan may allow employees to pay the premiums for their medical, dental, and vision coverage with pre-tax dollars. (It can also be used to pay disability insurance premiums, but that is a questionable plan design feature in my opinion.) Where this is the only feature of a cafeteria plan, it is often called a "Premium Only Plan." Thus, a cafeteria may have any one or more of the following features: 1. health care reimbursement accounts; 2. dependent care reimbursement accounts; and/or 3. the ability to pay certain insurance premiums on a pre-tax basis.

Rev. Rul. 83-183, 1983-2 CB 220, provides as follows: A judicial determination of the validity of a marriage has never been a prerequisite to the filing of a joint return. Taxpayers who meet the requirements in their state of residence for a valid marriage may file a joint return even though they have never been legally declared married by a court of law. See Ross v. Commissioner, TCM 1972-122, Rev. Rul. 58-66, 1958- 1 C.B. 60.

mbozek: You said: Tax is imposed only on portion of distribution that is taxed as ordinary income, i.e., employer basis * * *. I assume that you meant the employe's basis. Obviously, the employer doesn't have any basis in its own stock. Your post showed that you are aware of a nuance that is unknown to many people; the employee's basis in the shares is not necessarily the same as the plan's "basis" in those shares.

The error was caused by erroneous advice given to the client that was put in writing, so that the client had recourse against the party that gave that advice. Again, I differ with E as in ERISA. If the employer has an absolute right to indemnification for the losses caused by a third party, I think that the employer would be crazy if it exposed itself to even a .0001% chance of getting into a fight with the IRS just so that it can save some money for the person who gave blatantly bad advice to the employer that caused the problem. Even if the employer decides to fix the problem through EPCRS, why should I expend any efforts to minimize the indemnification costs of the negligent party? It seems fair that if that party wants to keep its costs down, the burden should be on them to devise that methology. I would be willing to propose whatever correct technique that they would like me to propound to the IRS, but it isn't my job to spend time trying to save them money. (The negligent party was a major institution with ample resources to create innovative solutions if it wanted to.)

E as in ERISA: The question in the original post by mariemonroe was whether there was a problem in the past because deferrals weren't taken out of bonuses You blithely stated: There is nothing that says that a particular participant election has to apply equally to all of the plan's definition of "Compensation." That is a clear response to the question in the original post by mariemonroe, with your saying that there's no problem here. Your original post missed the issue that if the election applies to "compensation" it applies to all compensation. Trying to argue the "compensation" doesn't mean "Compensation" is reminiscent of a similar semantical debate engendered by a recent president and will be equally unconvincing. Failure to operate a plan in accordance with its terms disqualifies the plan according to the IRS. I consider that to be ERISA 101. On the other hand, if you are saying that it is OK if the election form only applies to salary and not to bonuses, why doesn't that disqualify the plan because the plan doesn't authorize making elections only with respect to salary? I agree with Jduns in that there is a problem in the past, but you could avoid the problem in the future by a plan amendment.

Tom and Everett: Thanks for providing that information.

Mbozek: If the plan fiduciaries disclose the information, then where is the violation of federal securities laws? By definition, that information is then public, so that there can be no impermissible trading based on material nonpublic information.

My position, stated in a rather cryptic fashion, was stated more expansively by JDuns. My familiarity with this issue arose because I had a case where the correction amount was close to $500,000, even though this operational failure only affected one plan year. The unique feature of this situation was that the average bonus was $75,000 per employee, including every single employee in the company. In case you are wondering, this was not the Orange County, California employer that got all of the nationwide publicity for its monstrous sized bonuses.

E as in ERISA: You position is in direct conflict with that of the IRS. This is a very basic issue; ERISA 101. You need to start doing your homework before you start posting advice on BenefitsLink or you will get many posts pointing out the errors in your advice.

Everett Moreland: Thanks for that post. I've found it difficult to find much useful information on Davis Bacon plans. Do you know of any treatise, article, or website that would be helpful?

Mbozek: You said Are you implying that it is possible for the fiduciary to violate federal securities laws pursuant to the argument that they need to do so to avoid violating ERISA?

vebaguru: I don't think that the analogy to DB plans is apt. The present value of the future pension benefits can be accurately computed using the actuarial assumptions contained in the DB plan. There is no comparable way of computing the present value of future benefits in a retiree health plan.

PORTE: I think that a more proper characterization of those people who are peddling these arrangements is that they are "very aggressive" rather than "very smart." How they get around the discrimination issue that only the owner is allowed to invest in company stock? If, to solve that problem, they open that investment choice to all employees, then they have horrendous secrurities laws issues.

QDROphile: You stated: Isn't it more correct to say that the AP does not have a unilateral right to designate a beneficiary under the QDRO rules? But couldn't the plan be more generous? Admittedly, the odds of the plan being that generous are less likely than the odds of Ralph Nader being elected president, but isn't it theoretically possible? Or is there some distribution or other qualification requirement that might prevent that from occuring that I've not thought of? I've seen many defined contribution plans allow the alternative payee to designate a beneficiary (if the alternate payee dies before the amount is actually paid to the alternate payee but after the plan has accepted the QDRO).

A friend of mine has a practice that specializes in orphan plans. I seem to recall that he says that it comprises about 80% of his practice. He was an ERISA attorney in private practice for many years, but has switched over to acting as an independent fiduciary and taking over orphan plans (acting as the fiduciary of the plan and handling all of the recordkeeping functions). I've known him for between 15 and 20 years and recommend him highly. In fact, one of my clients hired him this week. Just in case anybody is wondering, I don't get any kickbacks from him. Also, I'm not doing this to return a favor, because he has never sent me any business. I'm recommending him solely because I know him and respect the quality of his work. Here is his contact information: Nick Saakvitne (310) 451-3225 saaklaw@aol.com www.ERISAFiduciary.com NICHOLAS L. SAAKVITNE, A LAW CORPORATION 4712 Admiralty Way, PMB #601 Marina Del Rey, California 90292